Advisers not very confident on their annuity know-how

Morningstar research shows that advisers prefer systematic withdrawals in retirement

Oct 19, 2012 @ 3:34 pm

By Darla Mercado

annuities, morningstar
+ Zoom

Despite their clients' interest in guaranteed income, many advisers still hesitate to recommend annuities.

Much of that uncertainty appears to be tied to lack of understanding and experience with the insurance products, according to research from Morningstar Inc. The firm polled 106 advisers from a variety of backgrounds, including independent broker-dealers, registered investment advisory practices and wirehouses.

Participants graded a trio of retirement income distribution methods: systematic withdrawals, insurance-based solutions or a “bucket” approach, in which some money is set aside for income and other assets are invested for growth, depending on the time horizon.

Of the three approaches, advisers preferred using the systematic-withdrawal approach. Buckets were second and insured products were third.

Economic climate aside, advisers like the idea of clients' living on a percentage of assets because it's the simplest concept to explain, according to John McCarthy, director of insurance solutions at Morningstar.

At the same time, surveyed advisers also find systematic withdrawals to be the least theoretically sound of the three concepts, likely due to the fact that today's stock market volatility and stagnant interest rates have caused many to reconsider that method, he added.

The buckets approach ranked first for being theoretically sound, followed by insurance-based solutions.

Respondents take issue with the buckets approach, finding it complicated to implement, but still they seem to prefer that to trying to understand annuities.

“Insurance may have some traction as being a decent idea, but the reps don't understand it as well, and as a result, their clients might not understand it well, either,” Mr. McCarthy said. “As soon as you get into the income floor and insurance products, you throw in an element of complexity.”

Indeed, that skepticism of annuities was reflected in the survey when nearly 6 in 10 advisers said they “never” recommend longevity insurance — or a deferred income annuity — to their clients. That's likely tied to the fact that longevity insurance is a fairly new product and hasn't had time to gain a following, Mr. McCarthy said.

While advisers are aware that they have an income distribution problem to solve, many still have a problem understanding the solutions available.

Eighty-one percent of the participants said that they are “very concerned” or “somewhat concerned” about their clients' ability to sustain a comfortable level of income. However, only 62.4% feel that they have a “thorough” understanding of the different retirement income solutions; fully 37.7% either understand the products “somewhat” or have a “limited” comprehension of how they work.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

How to redesign, rebrand and recast your practice

Redesigning and reshaping your practice is a tough pill to swallow for advisers. But what got you here won't get you there, says John Kozuch, a Chicago financial adviser.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

T. Rowe Price steps up its game to serve financial advisers

The Baltimore-based mutual fund giant is more aggressively targeting financial advisers with a beefed-up wholesale crew and placement on custodial platforms.

The most important tax changes for 2018

The Internal Revenue Service issued inflation adjustments to more than 50 tax provisions for 2018.

Shift to Roth 401(k)s 'highly likely' part of tax reform: former Treasury official Mark Iwry

Mandated contributions to Roth accounts would likely only be partial, as opposed to having a full repeal of pre-tax accounts.

E*Trade acquiring custodian Trust Company of America

Discount broker buying second-tier custodian for $275 million.

Another thousand Dow points higher, and investors yawn

Market milestones keep falling like dominoes, with 51 records broken so far this year.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print